“Sweeps” Salvage Sinking SEC Enforcement Results
The U.S. Securities and Exchange Commission recently announced its annual enforcement results for Fiscal Year 2024. The SEC placed considerable emphasis on the record-setting $8.2 billion in financial remedies the agency obtained in 2024. But many observers outside the SEC are focusing on the sharp decline in enforcement actions. In 2024, the Division of Enforcement brought 583 enforcement actions—a 26 percent decrease compared to 2023. See SEC Small Business Advisory Committee to Discuss the Accredited Investor Definition and the Role of Diversity in the Investment Process, (Nov. 22, 2024) available at https://www.sec.gov/newsroom/press-releases?combine=&year=All&month=11.
The 2024 figures buck a trend of SEC enforcement results that had seemed to tick up year-over-year. In 2021, the agency brought 697 enforcement actions; it brought 761 actions in 2022, and 784 in 2023. Id. In fact, the number of enforcement actions has dipped below 700 only three times since 2010, and the Division of Enforcement had not reported a figure in the 500s since before the financial crisis. The Fiscal Year 2024 numbers were shockingly low.
It could have been worse.
Indeed, the number of enforcement actions in 2024 was inflated by several enforcement “sweeps” that netted more than 130 enforcement actions—roughly 22 percent of all SEC enforcement actions for the year. In 2024, the Division of Enforcement bundled and announced together groups of cases alleging violations of SEC recordkeeping, reporting, marketing, or whistleblower protection rules. Each bundle of cases resulted from a so-called SEC enforcement “sweep.”
Although the number of SEC enforcement actions in 2024 was lower than many anticipated, the prominence of enforcement sweeps is significant because: (1) it reveals that the SEC is once again aggressively relying on sweeps to drive the agency’s enforcement agenda; (2) sweeps allow the Division of Enforcement to use its limited resources more efficiently and can be an effective way to maintain an active enforcement program during a change of administration; and (3) several of the sweeps appear to be ongoing and will carry into the next administration.
SEC Enforcement Sweeps: A Short History
SEC Enforcement sweeps are, essentially, targeted investigations into what the SEC believes to be similar misconduct among entities or individuals that operate in the same space and are subject to the same regulatory compliance framework. The SEC’s Division of Corporations may observe, for example, that many issuers of a certain size are routinely failing timely file certain periodic reports and may commence multiple investigations simultaneously (the “sweep”). The SEC may choose to announce a resulting group of enforcement actions all together—a tactic it believes to have a strong deterrent effect on similarly situated entities. In 2016, a past SEC Enforcement Director described enforcement sweeps as follows: “A sweep is a group of enforcement actions brought simultaneously against different parties who have engaged in similar violations. Sweeps can be particularly effective where there is widespread misconduct.” The Impact of SEC Enforcement on Public Finance, (Oct. 13, 2016), speech available at https://www.sec.gov/newsroom/speeches-statements/speech-ceresney-10132016. Although sweeps are regarded by many as an efficient enforcement tool, in 2017, another former SEC Enforcement Director signaled a turn away from the SEC’s strategy of relying on sweeps to uncover misconduct. The former director suggested that, because of resource constraints, the Division would “have to be selective and bring a few cases to send a broader message rather than sweep the entire field.” Dave Michaels, SEC Signals Pullback from Prosecutorial Approach to Enforcement, WSJ (Oct. 26, 2017), available at https://www.wsj.com/articles/sec-signals-pullback-from-prosecutorial-approach-to-enforcement-1509055200.
The reliance on enforcement sweeps did not stop altogether, but in the current SEC, sweeps have gained even more prominence as an important investigative and enforcement tool. In 2022, then-Enforcement Director Gurbir Grewal explained:
Another way that we work to address the declining trust in the financial markets is by conducting proactive enforcement sweeps and initiatives that specifically target recurring issues. Filing multiple, coordinated actions simultaneously not only demonstrates accountability, but also has a more pronounced deterrent effect than if the Commission filed separate standalone cases at different times. . .. You can expect to see us employ these strategies more frequently moving forward.
Remarks at Securities Enforcement Forum (Nov. 15, 2022), available at https://www.sec.gov/newsroom/speeches-statements/grewal-speech-securities-enforcement-forum-111522. The strategy of conducting proactive enforcement sweeps and initiatives paid dividends in fiscal year 2024 in several key areas: (1) Off-Channel Communications; (2) Beneficial Ownership and Insider Transaction Reports; (2) Marketing Rule Violations; and (3) Whistleblower Protection Rule Violations.
1. Off-Channel Communications
In fiscal year 2024, the SEC brought enforcement actions against more than 70 financial services firms for failing to maintain and preserve electronic communications as required under certain recordkeeping provisions of the federal securities laws. The cases all stem from the firms’ failures to collect and keep their employees’ work-related communications through various text messaging applications (so-called “off-channel” communications). The firms, including broker-dealers, investment advisers, nationally recognized statistical rating organizations (“NRSROs”) and municipal advisors, agreed to pay combined civil penalties of more than $600 million. Notably, all of the firms were required to acknowledge that their conduct violated recordkeeping provisions of the federal securities laws, and all have undertaken various measures to enhance their compliance policies and procedures to address the violations—in some cases, retaining independent compliance consultants. See, e.g. SEC Press Releases on Feb. 9, 2024 (“Sixteen Firms to Pay More Than $81 Million Combined to Settle Charges for Widespread Recordkeeping Failures”), Sept. 3, 2024 (“Charg[ing] Six Credit Rating Agencies with Significant Recordkeeping Failures”), Sept 17, 2024 (“Charg[ing] 12 Municipal Advisors with Recordkeeping Violations”), and Sept. 24, 2024 (describing $88 million combined settlement by eleven firms to settle “Widespread Recordkeeping Failures”) available at https://www.sec.gov/newsroom/press-releases.
2. Beneficial Ownership and Insider Transaction Reports
In September 2024, the SEC brought enforcement actions 36 entities and individuals for failing timely to file beneficial ownership or insider transaction reports. These included charges against 11 institutional investment managers for failing to file Form 13F reports, which are quarterly reports filed by institutional investment managers that have investment discretion over more than $100 million in certain securities, and charges against 25 entities and individuals for failures timely to report information about their holdings and transactions in public company stock on Schedules 13D and 13G and/or Forms 3, 4, and 5. Collectively, the entities and individuals agreed to pay more than $7 million to settle the charges. See, e.g., SEC Press Releases on Sept. 17, 2024 (“Charg[ing] 11 Institutional Investment Managers with Failing to Report Certain Securities Holdings”), and Sept. 25, 2024 (“Lev[ying] More Than $3.8 Million in Penalties in Sweep of Late Beneficial Ownership and Insider Transaction Reports”) available at https://www.sec.gov/newsroom/press-releases.
3. Marketing Rule Violations
In 2024, the Enforcement Division continued its initiative to enforce compliance with the SEC’s amended marketing rule. The Division brought settled enforcement actions against at least 17 investment advisers for Marketing Rule violations. In all, the firms agreed to pay more than $2.3 million to settle the SEC’s charges. The cases alleged a wide range of misconduct, including investment advisers that misled customers about the firms’ use of artificial intelligence, firms that relied on performance advertising that was not fair and balanced, firms that disseminated advertisements that included untrue or unsubstantiated statements of material fact or testimonials, and firms that failed to adopt and implement policies and procedures required by the Marketing Rule. See, e.g., SEC Press Releases on March 18, 2024 (“SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of Artificial Intelligence”), April 12, 2024 (“SEC Charges Five Investment Advisers for Marketing Rule Violations”), June 14, 2024 (“SEC Charges Pennsylvania-Based Investment Adviser for Misleading Advertisements”), Aug. 9, 2024 (“SEC Charges Washington-Based Registered Investment Adviser with Marketing Rule Violation”), and Sept. 9, 2024 (“SEC Charges Nine Investment Advisers in Ongoing Sweep into Marketing Rule Violations”), available at https://www.sec.gov/newsroom/press-releases.
4. Whistleblower Protection Rule Violations
In September, the SEC announced settled charges against seven public companies, three registered investment advisers, and one registered broker-dealer that allegedly violated the SEC’s Whistleblower Protection Rule by using employment, separation, and other agreements that could impede whistleblowers from reporting potential violations of the federal securities laws to the SEC. The SEC has brought a smattering of enforcement actions over the years charging companies for conduct that has the potential to impede whistleblowers. But this recent wave of enforcement actions is regarded by many as the latest SEC enforcement sweep. The companies and financial services firms agreed to pay more than $3.7 million to resolve the matters. See, e.g., SEC Press Releases on Sept. 4, 2024 (“SEC Charges Broker-Dealer Nationwide Planning and Two Affiliated Investment Advisers with Violating Whistleblower Protection Rule”), Sept. 9, 2024 (“SEC Charges Seven Public Companies with Violations of Whistleblower Protection Rule”), and Sept. 26, 2024 (“SEC Charges Advisory Firm GQG Partners with Violating Whistleblower Protection Rule”), available at https://www.sec.gov/newsroom/press-releases.
SEC Enforcement Sweeps Salvage SEC Enforcement Results
Together, as noted, these enforcement sweeps accounted for more than 130 settled enforcement actions in fiscal year 2024. Assuming the total number of enforcement actions for the year approximates last year’s figure, the sweeps alone will account for 15-20% of all SEC enforcement actions in 2024. Given the sweeps’ capacity to boost the Division of Enforcement’s numbers both in terms of the number of actions filed and the large civil monetary penalties imposed—especially the large penalties extracted in the off-channel communications case—we should expect SEC enforcement sweeps to continue.
Indeed, there is no reason to believe the off-channel communications, beneficial ownership and insider transaction reports, marketing rule, or whistleblower protection rule sweeps have concluded. And it is rumored that other sweeps are underway—including sweeps into regulated entities ESG, cybersecurity, and AI-related disclosures. Do not get swept up. Be on the lookout for SEC press releases announcing enforcement sweeps and take lessons from the misconduct alleged in bundled enforcement actions.